Brinks Company: Activists push

for a spin-of
Masters in Finance | Applied Corporate Finance

April 20th 2015

Duarte Marques 989

Mafalda Oom Torres 948
Teresa Botelho Neves 1029
Francisco Vieira de Campos
960
Gonalo Pereira de Almeida
1034
Nova School of Business and Economics

Agenda

Executive Summary
Industry Overview
Brinks Company
Conglomerate Discount
Activists
Issues being target my activists
Brinks is undervalued by the Markets
Alternatives to Spin-ofs
Value created by Spin-ofs
Valuation
Final Recommendation

Agenda

Executive Summary
Industry Overview
Brinks Company
Conglomerate Discount
Activists
Issues being target my activists
Brinks is undervalued by the Markets
Alternatives to Spin-ofs
Value created by Spin-ofs
Valuation
Final Recommendation

Executive Summary
The decision of performing a spin-off follows pressure on the company
from three activist shareholders who felt that Brinks has been chronically
undervalued and separately it would be worth more than combined
Since Top Management and activist shareholders were not align in terms
of what was best for the company, the case presents both sides.
Moreover, an assessment of the arguments was performed
Nevertheless we have to bear in mind that Brinks Company is made of
two different business that seem to share very few operational synergies,
which may be explained by the conglomerate discount that the
companies was under
Also alternatives to the spin-off were take into account, however we did
not exploit in so detail as the spin-off, since it was the main issue in the
case

Agenda

Executive Summary
Industry Overview
Brinks Company
Conglomerate Discount
Activists
Issues being target my activists
Brinks is undervalued by the Markets
Alternatives to Spin-ofs
Value created by Spin-ofs
Valuation
Final Recommendation

Industry Overview- Brinks Inc.

Globally

United States

$14bn

Global market for security

logistics
Projections to grow

Global Market Share

Brinks; 17%
4Securicor; 14%

Smaller Competitors; 50%

Securitas; 13%
Prosegur; 6%

Brinks

4Securicor

Securitas

Prosegur

Smaller Competitors

35%
Mark
et
Shar
e
Largest
competitor
with 30%
market share

Primary factors in attracting

and retaining customers in
the industry:
Reputation
Service Quality
Price

Industry Overview Brinks Inc. industry

Cost structure

Wages

Employ
ee
benefits

Service
Standar
ds

Overall
level of
security

Cost Structure
High
quality
and
reliable
insurance coverage
as an
important factor in attracting and
retaining customers and risk
management

5%<

Revenue
growth
for the
industry

>9%

Drivers for growth in the

particular industry:
Overall level of economic
activity, in particular to retail
activity.
Amount of paper currency in
circulation.

Industry Overview Brinks Home Security

Market for Electronic Security System

I.
Sale
s

II.
Leasi
ng

III.
Installati
on

IV.
Monitori
ng

$30 billion globally where US accounted for nearly

half of total annual revenues.

V.
Servi
ce

US

Rest of
the
World

The North American Market is highly fragmented with the top five companies accounting for
only 40% of the market which enables attractive opportunities for the M&A industry;
ADT, a subsidiary of Tyco International, is the largest company in the market (estimated
market share of 30%). Following ADT, BHS states a market share of 3%, Protection One of
2%, Stanley Convergent Security Solutions of 2% and Monotronics International of 1%.

Company
Pric
Service and Product
reputation
e
quality
Ability to identify and solicit prospective
Market
costumers
visibility

Industry Overview Brinks Home Security

Market for Electronic Security System
Factors driving industry growth

Heightened
security
awareness

Higher capital
spending

Increase in dual
income
households

Demographic
changes

Higher capital
spending

Higher capital
spending by
business

Growth in home and commercial security system

installation and monitoring expected to grow at 3%
annually from 2009 until 2014 in the US

Agenda

Executive Summary
Industry Overview
Brinks Company
Conglomerate Discount
Activists
Issues being target my activists
Brinks is undervalued by the Markets
Alternatives to Spin-ofs
Value created by Spin-ofs
Valuation
Final Recommendation

Brinks Company
Brinks was founded in Chicago on May
5th , 1859, when Perry purchased a
horse-drawn wagon and made his first
delivery.
In the early days, Brink used his single
wagon to transport travelers' luggage
between Chicago rail stations and
hotels.
As a curiosity, In 1871, the Great
Chicago fire destroyed some 18,000
buildings, including the headquarters
of Brink's City Express. Miraculously,
Brink's horses and wagons were saved
and the company was back in
operation within a week.

Perry Brink

1981= Payrolls deliveries;

1962= Pittston Company acquires
Brinks, by then known as an
armored car company;
2000= Activists investors were
calling for Brinks to sell its BAX
unit which ended up happening in
November 2006 for $1.1 billion to
Deutsche Bahn Group, a
transportation and logistic
Inc. worldwide
company. Brinks
provider of secure
BRINKS
transportation
Brinks Home Security
Residential Alarm company

Agenda

Executive Summary
Industry Overview
Brinks Company
Conglomerate Discount
Activists
Issues being target my activists
Brinks is undervalued by the Markets
Alternatives to Spin-ofs
Value created by Spin-ofs
Valuation
Final Recommendation

Conglomerate Discount
Conglomerate: Company that comprises multiple different
corporations that operate in a wide rang of business. Usually there is a
parent company (Brinks Company) with one or more subsidiaries
(Brinks
Inc. conglomerates:
and BHS)
Problems
with
There are few synergies between unrelated business;
The extra layers of management needed, compared to
standalone businesses increases costs;
A conglomerate is likely to disclose less information than
standalone businesses; many numbers are disclosed
consolidated, rather than separately for each business;
The complexity of a conglomerates' accounts can make
them harder to analyze - and makes it easier for
management to hide things;
Management are very unlikely to have real expertise in all
areas of the business, leaving it more difficult to align
interests.
Conglomerates usually are traded at discount

Conglomerate Discount
Why do conglomerated typically trade below
their sum of the parts?
V(A+B) < V(A) Conglomerate discount: is the difference between what the
businesses are worth separately, and the actual value the
+ V(B)
Sum-ofmarket places on the conglomerate. Its name derives
parts
valuation essentially for that tendency of the stock market to
undervalue the stocks of a conglomerate business.
Investors often point to the conglomerate discount as a
market inefficiency and view the discount as a way to buy
undervalued stocks.
Stock Market
Explanations

Value of
Brinks
Inc.

Market cannot understand multi-division firm and attach a

correct multiple to its earnings or cash flow
Companies dont allocate analysts from each market segment
to study conglomerate firm
Value of
Brinks
home
security

Value of
Brinks
Company

Conglomera
te Discount

Agenda

Executive Summary
Industry Overview
Brinks Company
Conglomerate Discount
Activists
Issues being target my activists
Brinks is undervalued by the Markets
Alternatives to Spin-ofs
Value created by Spin-ofs
Valuation
Final Recommendation

Activists
Activist investor: An individual or group that purchases large
numbers of a public company's shares and/or sought to obtain seats on
the company's board with the goal of effecting a major change in the
company. Activists deliberately accumulate substantial stakes in
undervalued companies to force changes that will increase the share
price so they can sell at a profit.
Target: Activist investors look for companies that are being
mismanaged, have room to cut costs, could be run more profitably as a
private company or have other kind of problems that the activist
investor believes is able to fix to make the company more valuable.
Hedge
Funds
Private
Equity
Firms

Wealth
Individu
als
Exampl
es of
activist
s

Activists

MMI
Investme
nts

Activists

Pirate
Capital

Steel
Partners
LCC

Private Investment Fund run by

Clay Lifflander
Known for gaining positions in
companies shortly before buyout
deals were made and had a
reputation for its buyout touch.
U.S.-based hedge fund was
founded in 2002 by Tom Hudson
Their strategy was to buy stocks
and take on management to drive
stock prices in the companys
favor.
One seat at Brinks board of
Hedge
fund founded by Warren G.
directors
Litchtenstein
Invest in small-cap value stocks
where they felt they could create
value through active relationships
with managements

Activists

Activist
shareholder

Active on
firms
manageme
nt

Increase
Stock
Performanc
es

How do activists expect to make money?

Activists shareholders try to be active on firms management, in
order to drive the strategy of the company to their benefits. In
this case, they want to change the actual strategy of the firm
because they believe that the actual strategy does not increase
shareholders wealth.
They believed that the company was undervalued.
They want to increase their wealth by increasing stock
performances and make money out of that.

Agenda

Executive Summary
Industry Overview
Brinks Company
Conglomerate Discount
Activists
Issues being target my activists
Brinks is undervalued by the Markets
Alternatives to Spin-ofs
Value created by Spin-ofs
Valuation
Final Recommendation

Issues being target by activists

Brinks was trading as much as 35 % below its intrinsic value.

They were frustrated that the board and management remained committed
to its growth strategy.
Instead, they wanted Brinks to pursue strategic options to improve the
stock price.
MMI became the second largest stakeholder in BCO and given its frustration
it was nominating 4 directors for election to board at BCOs 2008 annual
meeting.
Pirate Capital was seeking for return because 2006 was the worst
performance of the fund (only returns of 9.5% compared to 15.8% from
S&P500)
Steel Partners was making pressure to Brinks Company pursue strategic
alternatives recommended by it.

Tax-free
split- up

Brinks
Compa
ny

Brinks Inc.
Brinks
Home
Security

Issues being target by activists

MMI Investments Recommendations

November
MMI increased
its ownership
in BCO to 6.7%

200
5

November
BCO sold BAX
unit

200
6
April
Submitted a letter
recommending that it
divest its BAX unit

BAX had a cumulative net

loss of $50 mm over the
last 5 years
This was underpricing the
company

200
7
December
Four strategic
alternatives: a
strategic
acquisition, a
leverage buyout,
splitting up BCO,
and a leveraged
recapitalization

November
MMI announced
that it was
nominating four
directors for
election to board
at BCOs 2008
annual meeting

July
Refined its
analysis and
recommended
a tax-free spinoff

Issues being target by activists

Pirate Capital Recommendations

200
6

November
Recommended to
initiate a Dutch
tender saying that
was an opportune
time.
They requested
that
Tom Hudson be
appointed to the
board immediately

August
Letter to the board
encouraging BCOs to
take immediately steps
to unlock long-term
shareholders value by
retaining an
investment advisor to
explore the sale of the
company
BCO failed
to do what
Pirate Capital asked

200
7

February
Announced that
Hudson would
take a seat on the
board

January
Letter asking for
a detailed report
about MMI
Investment
strategies
They also
recommend that
they should have
two members on
the board

August
Conduct a survey of
the 100 largest
shareholders to
determine the
interest of a Spin-off
49 % were in favor
of the spin-off and
another 18 %
interest in spin-off
but they wanted a
deeper analysis by

Issues being target by activists

Steel Partners LLC Recommendations

200
8
January
Send a letter to the board saying that the company is significantly undervalued and
were disappointed that the strategies implemented by the company didnt consider
their and the other shareholders recommendations. If Brinks will not pursue a spin-off
or other strategic alternative, they demand that Brinks pursue an immediately sale of
the company that maximizes value for all shareholders. They also say that due to the
undervaluation, the company should be aggressively buying back shares and should
significantly increase its repurchase program.

Agenda

Executive Summary
Industry Overview
Brinks Company
Conglomerate Discount
Activists
Issues being target my activists
Brinks is undervalued by the Markets
Alternatives to Spin-ofs
Value created by Spin-ofs
Valuation
Final Recommendation

Brinks is undervalued by the markets

Trading basis:
40%
undervalued vs.
public peers
based on 2006
EBITDA
multiples

Strategic
Transaction Basis:
35% undervalued
vs.recent multiples
in comparable deals
BCO
chronically
undervalue
d

Why?

s in
n
tio ing
a
l
lcu ollow
a
C ef
s
th slide

Brinks is undervalued by the markets

Key Valuation drivers that may not have
been considered
Possible
Synergies

BAX Global
sale

Decreasing
former
operations
expenditures

Growth
prospects
both
domestically
and Abroad

Secure
business
model
Aggressive
BHS growth

Legacy
healthcare
liabilities

Brinks is undervalued by the markets

Synergies

Ability to use the strong cash flow generation from Brink's Inc. to fuel
growth spending at Brinks Home as well as leverage the strong
Brinks brand name

BAX Global sale

Reduced the required funding for legacy liabilities by $225mm

Decreasing former operations expenditures

Declining required funding in legacy healthcare liabilities related to

coal as the beneficiary group ages, since the company is no longer
involved in this business

Growth prospects both domestically and abroad

New opportunities to expand to other markets (Asia)

Industrys revenues growth in the mid-to-high single digit range

Aggressive BHS growth

Growth drives future revenue but starves current free cash flow
BHS continued to gain market share within this highly fragmented
industry
Economies of scale could be achieved (by leveraging the
infrastructure of monitoring stations over more subscribers)
Potential for higher operating margins as little additional overhead is
required to support additional subscribers
Opportunities to increase its under-presence in the commercial
marketbusiness model
Secure
Strong cash flows and prudent level of self-insurance (low risk
expense)

Brinks is undervalued by the markets

Other explainable reasons for Brinks
undervalued
Industrys
unfavorable
characteristic
s

Missed
Expectations

Activist
Shareholders
demands

Deceptive
association
with the air
freight
industry

Uncertainty
relating to
the
companys
strategies

Brinks is undervalued by the markets

Other explainable reasons for
Brinks undervalued

Industrys unfavorable characteristics may lead share price

declines

Sensitive to overall level of economic activity and to retail activity in particular

Highly competitive and fragmented market
Pricing pressures from its competitors
Currency fluctuations impact on revenues since 70% came from outside the US

Failure in meeting earnings expectations due to Brinks growth efforts puts it

vulnerable to sharp price declines because markets tend to have a high
expectation for future earnings growth

Missed Expectations

Deceptive association with the air freight industry

Association with previous air freight industrys high capital costs and cyclicality
might be lowering valuation
BAX Global unit underperformance was an over-hang on the stock

Activist Shareholders demands

Activist Shareholders unsatisfaction and pressure it is not well seen by the

market, which might lead to a lower stock price
Lack of short-term measures to increase shareholders value companys low
leverage might be seen as a sign of lack of effort to invest in business
operations and increase value for shareholders

Uncertainty relating to the companys strategies

It might scare away buyers who buy shares they are more comfortable with

Agenda

Executive Summary
Industry Overview
Brinks Company
Conglomerate Discount
Activists
Issues being target my activists
Brinks is undervalued by the Markets
Alternatives to Spin-ofs
Value created by Spin-ofs
Valuation
Final Recommendation

Alternatives to Spin-of
We believe that there are strategic alternatives that the
company should take into account that can benefit from the
current strength of the mergers and acquisitions market as
well as the equity and credit markets in order to achieve the
true value of the company.

Share
Buyback

Leverag
e
Recapita
lization

LBO

Sale to a
strategi
c buyer

Alternatives to Spin-of |
Shares Buyback
A share buyback is a company buying back its shares from the
marketplace. Typically, it can be done through a tender offer or through
the open market.

Increases shareholders value by increasing the percentage of

ownership held by each investor and reducing the total number of
shares outstanding.
Boost Share Price, the buyback means there are fewer shares
trading on public markets and this tends to strengthen the share
price, at least in the short term.
With fewer shares trading, the EPS tends to rise, this helps the
company to beat market expectations and helps drive a higher
stock price.
Signs
market that
company
it is undervalue
and
Signalsthe
to investors
thatthe
there
are notbelieves
other profitable
opportunities
has
confidence
in itself,Every
whichdollar
can be
translated
in an
upward
to grow
the business.
used
to buy up
stock
is a swing
dollar
in
theisnt
stock
price.
that
hiring
more employees, ramping up marketing, acquiring a
competitor, developing a new product, or otherwise investing that
money to grow the business.
Companies spend a lot of money buying up shares and then cut
their dividend as a result, since the company has less cash to hand
out in dividends. So if youre an investor who relies on dividend
checks for income, this could hit you in the pocketbook.
The rise in stock price may help the stock hit a target price the
managers need to exercise their options, which can dilute the value

Alternatives to Spin-of |
Leverage Recapitalization
In a leveraged recap, firms announce a debt issuance and one-time
distribution of extraordinary dividends simultaneously and where the
distribution is material and is executed over a short period.

Unlocks value to shareholders.

Provides liquidity for the funds investment without losing control
or the ability to capture the benefit of the companys future sales
and earnings growth.
Cash flow savings from the tax shield attributable to the tax
deductibility of interest payments on the newly issued debt
Dividends are not tax deductible, and moreover the investors will
have to pay personal taxes over the dividends received
May leave it without the ability to adequately fund day-to-day
working capital needs and may impair future growth opportunities
or the ability to respond to and weather unanticipated business
downturns
Future debt issuance will suffer a higher cost of financing because
the amount od debt had increased

Alternatives to Spin-of |
LBO
A leveraged buyout or LBO is a type of aggressive business practice
wherebyinvestorsor a larger corporation utilizes borrowed funds (junk
bonds, traditional bank loans, etc.) or debt to finance its acquisition..

Usually PE companies can offer the highest price to the company

Massive restructuring of the company
The large interest payments force the company's management
team to increase operating efficiency.
The LBO can create a valuabletax shelterfor the target company,
because interest expenses are tax deductible.
No need to publish information

There is a dilution/loss of ownership stake for current investors

Different perceptions of value to the target firm and PE firm
Cost-cutting measures my hurt the business and reputation of the
company
High costs and time expenditure in due dilligence
High risk of bankruptcy given the large amount of debt
It can lead to hostile takeovers.

Alternatives to Spin-of |
Sale to a strategic buyer
Strategic buyers, companies already in similar lines of business, are
focused on enhancing their existing business model and the resulting
financial return to their shareholders from the purchase of the target
company.

May provide highest valuation for shareholders in the near term

May enable the entrepreneur to completely walk away (i.e. obtain
the greatest liquidity)
Potential operating synergies can improve the business
Typically, strategic buyers are very knowledgeable from an
operational and business perspective, facilitating due diligence and
closing; may be able to close much faster
Qualified buyers may not be constrained by financing contingencies
or be at the mercy of the credit markets
Management may lose autonomy, lose their jobs, or have their
rolesdiminished
Possible negative impact on culture and morale
May affect customer loyalty
Upside value potential may be sacrificed (unless there is significant
stock or earnout consideration)
Key concern is being caught up in bureaucratic delay
decisionparalysis
A secondary concern is related to access to competitive information,

Agenda

Executive Summary
Industry Overview
Brinks Company
Conglomerate Discount
Activists
Issues being target my activists
Brinks is undervalued by the Markets
Alternatives to Spin-ofs
Value created by Spin-ofs
Valuation
Final Recommendation

Value Created by Spin-ofs

Spin-offs Just like M&A, but the other way around...
M&A deals are carried under the belief that the combination of the two entities
may generate a new entity whose value is greater than the sum-of-the-parts
Spin-offs are carried out when a firm believes that its overall value would
increase separately (sum-of-the-parts > combined firm)
From as investors point of view, one advantage brought about by a spin-off
is the ability to manage separately their exposure to different businesses
May not fit their investment policy thus lowering the initial price when
selling
There is empirical evidence that both mother company and spun-of one, on
average, increase in value after separation
How do they create value to shareholders?
Straightforward method to redeem the value embedded eliminate
conglomerate discount
Increase of business/management focus restructuring opportunities
Variable compensation more linked to the units performance
Efficiency boost of the spun off unit more close supervision by shareholder of
top management
Asymmetry of information between the conglomerates management team
and the market
Seems a good solution to manage agency issues

Value Created by Spin-ofs

So, why conglomerates still exists?
Crate value by exploiting synergies between the units they are made up
of
What valuation could be expect at each company?
Since the company operates in 2 different businesses, we should do a
sum-of-the-parts valuation
value them separately (value them differently or give them
weights)
Based on publicly traded
Based on precedent transaction
companies
It may involves minorities, in
These are multiples of
other words, control
comparable prices (on the
premium
stock)
The market timing may
reflect transactions
affect the multiples used,
without control (net of
which may drive to
every
control
effect)
misleading
results
Brinks Inc.
and BHS
may
require different valuations
as separate

companies, given the discrepancy in M&A deals and trading multiples for
these businesses

Agenda

Executive Summary
Industry Overview
Brinks Company
Conglomerate Discount
Activists
Issues being target my activists
Brinks is undervalued by the Markets
Alternatives to Spin-ofs
Value created by Spin-ofs
Valuation
Final Recommendation

Valuation |
Publicly Traded Companies

Valuation |
Publicly Traded Companies

This valuation is based on 2006 and 2007 figures

The conglomerate multiples were weighted based on
EBITDA
Clear evidence of a conglomerate discount
Sum-of-the-Parts have an implied multiple slightly >
Conglomerate fair value

Assuming the
weighted average
of all security
companies
multiples based on
EBITDA weights

It seems that, in fact, there is a discount over the conglomerate and

therefore the Sum-of-the-Parts is higher than Conglomerate market value

Valuation Publicly Traded Companies

From a Bottom-Up analysis, the BCO is trading at lower multiples than the
industry...

Note the multiples among the two

businesses are different and security
services seem to have higher multiples.
Then, we believe this is based on the
industry fundamental and what is
relevant to see which business if
dragging the valuation down is the
comparison of the implied multiple for
each unit with the median and/or
average of the relevant peers

Vs
.

... It seems that the main responsible, quantitatively, appears to be BHS

given that is trading way below industry multiples in both years

Valuation Precedent Transactions

Only transactions after

2003 were considered,
due to:
Potential impact of
the Dot-Com Bubble
on transaction
multiples
Market Timing
Industry Median Multiples
were chosen to perform
the sum-of-the-parts
valuation given its lower
sensitivity to outliers
The monitoring industry
transaction multiples
seem to reflect some
control premium
However, in the
security services
multiples may imply
some sort of
discount...

Once again it is shown that the company is being undervalued

Agenda

Executive Summary
Industry Overview
Brinks Company
Conglomerate Discount
Activists
Issues being target my activists
Brinks is undervalued by the Markets
Alternatives to Spin-ofs
Value created by Spin-ofs
Valuation
Final Recommendation

Final Recommendation
Given the trend of consolidation within Security Services,
BCOs businesses are diferent in many ways and it would be
more efficiently run separately
Even with some drawbacks,
such as access and cost of
capital to sponsor expansion
growth, perceived different
without the Brinks brand
association (or Royalties fees)

We believe that there is only

few synergies that do not offset
the discount
Different geographic
footprints
Different skillset required

Gains could be taken from a tax-free spin-on

Through the valuations performed, the split-up in two companies
may be worth $80 to $85 per share
An increase between 30 to 40%
Securitas stock increased 21% from on month prior to the
split
Concluding, and after looking to other potential exit
strategies, we believe the spin-of route to be the most
appropriate one

Thank you for your attention.

April 20th 2015

Nova School of Business and Economics